Fundamental Major Currencies

By IBT Staff Reporter On 09/02/09 AT 2:57 AM

GDP (2Q P)

Previous

-0.1%

Forecast

-0.1%

Definition

The Gross Domestic Product measures the levels of goods and services, which are produced by the sixteen economies. It gives the exact percentage of output for a specific period of time, which is always the output of three months together and so the year is divided in fourth quarters. This reading is released on a quarterly basis by Eurostat.

The GDP reading is calculated based on the following equation:

GDP= C + I + G + (Exports-Imports)

The letter C stands for private consumption, which is a gauge in the levels of goods and services that are consumed by the household sector, it's also a good indicator to understand how the private consumer is behaving. This reading is a vital contributor to the GDP; because it clears the levels of confidence citizens have which will support them to spend more.

The letter I stands for the level of private investments in the economy, this reading also helps in clearing levels of confidence in certain economies, which would encourage private investments.

The letter G stands for the government expenditure, which is also known by the government as spending, it measures the levels of spending taken place by the government. The higher the government spending is the more it will cause expansion, yet this aspect in particular can be explained in a negative way also, the more the government spends means the economy is tumbling, because spending more means that changes in the fiscal policies will be needed leading to an intervention and so.

Exports are a measure of the levels of goods and services that are sold outside of the country.

Imports measure the amount of goods and services that are imported into a certain economy from foreigners.

General Effect

The Gross Domestic Product reading is one of the most important indicators, which is used by analysts and market participants because it clearly shows whether a certain economy is expanding or contracting, a reading above zero means an expansion but a reading below zero is considered to be a contraction in levels of growth.

Most fundamentals are combined with this reading, import, exports, government spending and investments along with private consumption; so understanding this reading means that we can understand the overall structure of the economy.

The GDP reading is watched closely, because it gives an idea about whether the Central Bank will alter the benchmark rates in the same period, if growth starts to retreat and starts heading towards low levels then the European Central Banks will start considering reducing their rates just to revive back from the growth, which is an attempt to ease the levels of money being leant into markets. Except, when the growth levels expand vastly it would start to create inflationary pressures, then the ECB will start to consider hiking rates just to make it difficult for citizens to get money from the banking sector.

Best Case Scenario

The best case would be if the reading showed an expansion like the one that happened in Germany and France as this will show that the economy improved in the second quarter of the current year and is on the right track of recovery after the monetary and fiscal tools adopted by the ECB and national governments were aimed to stop the economic degradation.

Worst Case Scenario

The worst case would be if the reading came worse than median estimates since this will show that the economy although managed to decline the pace of contraction compared with the first quarter, but still needs further help by the ECB by accelerating the pace of their 60 billion pounds stimulus or even slashing the interest rates further.